VAT treatment of underwriting fees

The judgment dealt with, inter alia, the following key issues:

• whether Woolworths Holdings Limited ("taxpayer") was entitled to deduct, as input tax, the Value-Added Tax ("VAT") it paid, on underwriting service fees charged by local service providers; and
• whether the taxpayer was obliged to declare and pay VAT on underwriting service fees paid to non-resident service providers (on the basis that such services constituted imported services).

Background

The taxpayer, an active investment holding company, provided management and other services to its subsidiaries.

The taxpayer participated, and assisted, in the management of its subsidiaries, including through the provision of financial services and group capital management. For such services the taxpayer charged fees.

In 2014 the shares of David Jones Limited ("David Jones") were acquired for a purchase price of R21,4 billion (which were held through two intermediate companies).

The acquisition was funded by, inter alia, a R10 billion fully underwritten renounceable rights offer made to resident shareholders (being 54.44% of its shareholders) and non-resident shareholders (being 45.56% of its shareholders). The rights offer assisted the taxpayer raise the capital needed to purchase the David Jones shares. For this purpose, the taxpayer obtained professional underwriting services from local and non-resident suppliers.

The taxpayer, in determining its February 2015 VAT liability:

• deducted input tax in an amount of R8.4 million. This amount appears to be approximately 45% of the VAT incurred on local underwriting services used in respect of the rights offer taken up by non-resident shareholders; and
• declared R15.5 million as VAT on imported services provided by non-resident underwriting service providers (and claimed a reduction of R12.9 million in relation to such services).

SARS submissions

SARS submitted that the underwriting services, relating to the rights offer, were not obtained for the purpose of consumption, use or supply in the course or furtherance of an enterprise conducted by the taxpayer. SARS’ reasons were as follows:

• the taxpayer had not, before the acquisition of David Jones, engaged in the activity of issuing shares in a continuous, unchanged or uninterrupted manner as an enterprise;
• the taxpayer had not, before and after acquisition of David Jones, traded in the issuing of shares;
• the taxpayer had not conducted an enterprise continuously or regularly;
• the rights offer was conducted as an isolated activity;
• the issuing of shares was not a sufficiently continuous or regular activity so as to constitute an enterprise activity;
• dividends were received because of shareholdings held and not because of an enterprise; and
• the taxpayer’s description of capital management services was an obfuscation.

Taxpayer submissions

The taxpayer submitted that it conducted an enterprise as an active investment holding company and provided various services in return for fees. It submitted that:

• the underwriting services were acquired in the course of furthering its enterprise;
• the input tax deducted was incurred for the purpose of making taxable supplies (thus satisfying such requirement in the input tax definition);
• the rights offer taken up by resident shareholders constituted an exempt financial service[2] (in respect of which input tax could not be deducted);
• the rights offer taken up by non-resident shareholders constituted zero-rated taxable supplies. [3]

SCA

The SCA considered the input tax definition and determined that input tax is incurred on taxable supplies used by a vendor, and on imported services used by a vendor, to make taxable supplies (and the deduction is allowed to the extent of such use) in the course or furtherance of any enterprise conducted by the vendor.

The SCA therefore determined what the taxpayer’s enterprise was by:

• identifying the activities that form the enterprise; and
• assessing whether the services were used in the course or furtherance of such enterprise.

The SCA held as follows:

• the taxpayer’s memorandum of incorporation described its main business as the business of an investment holding company focusing on direct or indirect investment in retail operations and matters ancillary thereto;
• the factual position was that a significant portion of the taxpayer’s activities were acquiring investments and attending to the financial management of those investments (supported by minutes relating to the raising of capital for itself and its subsidiaries);
• the taxpayer held a number of subsidiaries as investments (and earned dividends and interest from loans advanced to them);
• the taxpayer pooled capital and invested same in financial securities, sold shares in itself, and raised capital in the course of investing in subsidiaries;
• the taxpayer determined capital management policy and made capital management decisions for it and its subsidiaries;
• the taxpayer’s business bore the hallmarks of an active investment holding company;
• the taxpayer’s business included providing treasury and tax services, governance services, audit services, management services, capital management services (such as sourcing the most effective forms of debt and equity), and information technology services to its subsidiaries (in return for fees);
• SARS’ arguments ignored the taxpayer’s facts;
• SARS’ arguments were inconsistent with the definition of enterprise in the VAT Act (the essence of which requires that an activity be carried on regularly in South Africa and in the course or furtherance of which services are supplied to another person for a consideration);
• the proviso to the enterprise definition expressly stated that an activity conducted in connection with the commencement or termination of the regular activity is deemed to have been performed in the course or furtherance of the enterprise. This meant that a holistic consideration of the activities of the entity under consideration is required rather than isolating or segregating a single set of transactions;
• SARS’ attempts at distinguishing between a business and an enterprise was strained. A business conducted intermittently, even with long intervals, met the requirements of the enterprise definition;
• the taxpayer used capital raised by way of the rights offer to expand its enterprise and the acquisition affected the totality of its operations;
• the underwriting services were used to enhance the value of the taxpayer’s investments and were used in the course or furtherance of the taxpayer’s enterprise (there was a functional link between the rights offer (underwriting services) and the taxpayer’s enterprise) and the services were consumed in the course of making taxable supplies i.e. in respect of the zero-rated issue of shares to non-residents;
• the fact that the rights offer preceded the acquisition of David Jones and the relevant management agreement was immaterial (the sequence was a function of the method of raising capital). Furthermore, that management fees were earned more than a year after acquisition was also of no significance;
• output VAT liability did not arise in respect of underwriting services obtained from non-resident suppliers where such services were used for making taxable supplies (as same did not constitute imported services as defined);
• SARS impermissibly isolated the share offer (thereby ignoring the nature and extent of the taxpayer’s enterprise) and incorrectly reasoned that the share offer had to qualify as a continuous or regular activity on its own (in so doing, it ignored the impact of raising capital and the acquisition on the taxpayer’s business);
• SARS’ reliance on the De Beers[4] case was misplaced - in that case the holding of shares and receipt of dividends did not fall within De Beers’ main trading activities (which were mining and selling of diamonds from South Africa). The VAT incurred by De Beers related to professional fees in relation to a take-over bid (De Beers also obtained the services as it was under an obligation to report on the fairness and reasonableness of the take-over offer), and did not relate to its enterprise of mining, marketing and selling diamonds. The key principle emanating from the De Beers case was that unless one conducted business as an investment company, the investments held could not on their own be regarded as constituting an enterprise as defined;
• the SCA’s conclusion was supported by foreign case law. To hold otherwise would render South African tax law incoherent with domestic tax provisions and foreign case law.[5]

Conclusion

The judgment confirms that the definition of "enterprise" must be interpreted holistically, and due regard must always be had to a taxpayer’s factual circumstances. Such principles should not, in our view, be limited to the particular facts under consideration in this judgment.

The judgment also provides clarity on the VAT treatment of underwriting services obtained to raise capital for an active investment holding company. It affirms that isolated or once-off activities fall within the scope of an enterprise if functionally connected to enterprise activities.

Feel free to reach out to CMS for further insights and/or tax advice.
 

[1] Case number 863/2023 [2025] ZASCA 99.

[2] Section 12(a) of the VAT Act, 1991.

[3] Section 11(2)(l) of the VAT Act, 1991.

[4] De Beers Consolidated Mines v CSARS [2012] ZASCA 103

[5] The European Court of Justice held, in Cibo Participants SA v Directeur regional des impots du Nord-Pas-de Calais [2001] EUECJ C-16/00, the direct involvement of Cibo in the management of its subsidiaries is an economic activity and that the expenditure it incurred in relation to acquisition of a shareholding in its subsidiary had a direct and immediate link with its business. In Kretztechnic AG v Finanzamt Linz EU:C:2005:320 it was held that the costs of raising capital by way of a rights offer formed part of Kretztechnic’s overheads and had a direct and immediate link with its entire economic activity.